ETFs or Exchange Traded funds and mutual funds are two of the commonly preferred investment asset classes by investors apart from stocks. Though both of these have lot in common they are entirely different. Both these assets further consist of various different assets and provide diversification opportunities to investors.
You can invest in mutual funds through a mutual fund distributor whereas Exchange Traded Funds can be bough and sold on stock exchanges similar to stocks. Also, mutual funds are an asset which are managed actively by a fund manager. On the other hand, Exchange Traded Funds are only managed passively and usually rely on a particular market index. There is no fund manager in case of ETFs. This means that mutual funds are more expensive when compared to ETFs due to the additional cost of fund managers and other entities.
Mutual Funds
Mutual funds have picked up a great pace in the last few years in the market. Often considered to be an easy investment option, mutual funds have a minimum investment requirement depending on the type of fund. In case of funds with, monthly installment facility known as a Systematic Investment Plan (SIP) there is also a minimum cap on the monthly installment one needs to pay.
Mutual funds collect the funds from many investors and invest it further into various different asset classes. A fund manager manages the mutual funds and almost every mutual fund charges a fee from the investors towards the fund manager.
Mutual Funds can be further classified as Open Ended Funds and Closed Ended Funds.
Exchange Traded Funds
Exchange Traded Funds are commonly known as ETFs and cost far less for an entry position, which can be as low as the cost of a share plus some additional taxes and fees. ETFs are bought and sold similar to stocks through stock exchange and also provide the flexibility of short selling. The facility of short selling has attracted many short term traders towards the ETF market.
Since ETFs are priced continuously by the market, there are large trading opportunities which are created in them. However, ETFs are passively managed and therefore realize fewer capital gains.
Stocks
Directly investing in stocks is what most of the traders and investors prefer. Given the fact that investing in stocks comes with a lot of flexibility. However, investing in stocks is not that easy and requires you to have a demat and trading account first. Moreover, you should have basic idea and knowledge about stock selection. Investing in the wrong stock can wipe out your portfolio in a few minutes.
A SEBI registered investment advisor can help you invest in stocks. These advisors have a team of qualified researchers and analysts who study markets and conduct technical and fundamental analysis to generate research-based recommendations for investing in stocks.
There is often a misconception amongst investors which forces them to search for risk-free investment options. However, it must be noted that with return comes risk. There is almost no investment option which has no risk associated with it. Therefore, it is necessary to have your risk profile evaluated from a registered investment advisor before you invest.
Happy Investing!
